Monthly Archives: July 2012

Do great droughts and great recessions coincide?

Anybody else find it odd that these great droughts occur during weak economic times? The Dust Bowl of the 1930s occurred during the middle of the Great Depression. Now this one during our Great Recession.

Or perhaps it is because a nation is able better endure these hardships when times are good…

Taxing offshore accounts would solve 6% of the problem. What about the 94%?

Proponents of big government and haters of the rich are making a big deal about $21 trillion that is being hidden in tax-free offshore accounts. The Observer reports:

A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.

James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, The Price of Offshore Revisited, released exclusively to the Observer.

He shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is, as Henry puts it, “protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy”. According to Henry’s research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than £4tn in 2010, a sharp rise from £1.5tn five years earlier.

The information I wanted didn’t appear until paragraph eleven:

Assuming the £13tn mountain of assets earned an average 3% a year for its owners, and governments were able to tax that income at 30%, it would generate a bumper £121bn in revenues – more than rich countries spend on aid to the developing world each year.

That £121 billion is about $200 billion. The global budget deficit runs at about $3.5 trillion or 5.3% of GDP.  (The United States leads the way with a deficit of $1.3 trillion or about 9.3% of GDP.) If these hidden assets suddenly became taxable, the global budget deficit would decline by about 6%, assuming the governments don’t just spend the newfound money.

No plan to “tax the rich” or “close loopholes” can possibly reduce the budget deficit by a significant amount. As I noted previously, the U.S. government would need to double income tax rates to close the budget deficit. Obviously, this is unfeasible because tax avoidance would rise when the “wealthy” are faced with a 70% income tax rate in addition to state and other taxes. Additionally, this doubling would also apply to the poor and middle class.

The government simply cannot raise taxes enough to make any significant dent in the deficit. The idea of taxing “hidden” money would only solve 6% of the problem and that excludes the cost of enforcement. Maybe we should focus on the other 94% of the deficit rather than the 6%.

James Madison on Obamacare

Obamacare is being threatened yet again as a new mistake is discovered in the 2,000 page bill.

States could dodge a key part of the health care reform law because of a little-noticed mistake in the lengthy bill, according to a white paper by conservative health care experts Michael Cannon and Jonathan Adler.

A missing word in the law’s definition of a health insurance exchange could prevent the federal government from doling out crucial subsidies to aid middle class and lower-income people in buying insurance in states that refuse to set up their own exchanges. (Only 14 states are close to setting up exchanges so far. The federal government will set up back-up exchanges in states that don’t have their own by 2014.) If Cannon and Adler are right, the federal government would also not be able to fine large employers in states without exchanges if their lack of coverage leads employees to buy insurance in a federal exchange.

The law defines a health insurance exchange as a “governmental agency or nonprofit entity that is established by a state” in one section of the law, and then says later that individuals who participate in exchanges under that definition are eligible for subsidies. Because the law only says a “state” and not “a state or the federal government,” Cannon and Adler argue that the federal government cannot legally dole out subsidies or tax breaks to people who buy insurance from federal exchanges.

All this reminds me of what James Madison wrote in Federalist No. 62:

It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.

Our Founding Fathers would be appalled at 2,000 page bills that are rushed through Congress without a single Congressman reading it before voting nor the President before signing it.